Monday, April 11, 2016

The Real Threat - State Run Plans

Now that the OMB has released the final version of the DOL's Conflict of Interest rule, it is a perfect time to look at the other major event looming on the horizon in the 401(k) world. Arguably, as far as threats to industry are concerned, this one is the bigger threat. This is the issue of State offered and State-Run retirement plans.

In Brief:

Right now approximately ½ of the states are considering some
type of public sector retirement offering. In general the types the states are considering fall into one of three categories:

1.)Mandatory Plan using a State-Run Automatic
Contribution IRA

a.Typically
for Employers over a certain size not currently offering a 401(k), Pension,
Simple IRA, SEP or other type of plan, minimum # of employees will vary from
state to state

b.This
grants them safe harbor from being covered under ERISA per the DOL

c.Generally
what the “blue” states are considering

2.)Voluntary Marketplace Model – For companies with
less than 100 employees

a.IRA
Type products, includes the OBAMA MIRA program

b.Both
Blue and Red states considering this

3.)Voluntary State Run plan – Akin to the state
entering as a competitor to the private sector

1.)That
the states could be granted Safe Harbor from ERISA if the state program was

a.)
Mandatory and

b.) Auto-IRA based

2.)It allows for creation of State-Run OPEN MEPs – No states have yet to pursue this b/c
this would NOT be exempt from ERISA. This potentially gives an unfair
advantage to a state offering since Open-MEPs are not yet available within the
private sector

3.)Now
the DOL is done with the Fiduciary Rule – State Run plan rules/regs. is the
main priority. The DOL will be trying to get rules to OMB by July to get
them through under Obama’s term

State by State: California, Maryland and
Connecticut are closest to passing something in 2016

Connecticut – Their study was completed in
2014, looks likely to pass in 2016. There is a potential hold back to
passage which is that in 2017 CT will be having major budget cutbacks, and this
new bill will cost CT $10m to implement. There may not be $$ for this at
this time.

Some wrinkles here.

1.)There
was some interest within the state to add certain coverage requirements,
specifically that if you were a CT resident who was employed but wasn’t offered
a workplace retirement plan and your employer has 5 or more employees, that the
employer would be required to offer you the state option. The wrinkle was
that this would be for ALL employees, so for example, a CT based employee of a
company out of Kentucky that didn’t offer a workplace retirement plan.
That KY employer would now be required to offer the CT based employee the state
auto-IRA plan. This would also go for CT employees that were excluded for
some reason, such as part-time employees. This was wrinkle was removed.

2.)50%
of Accumulated funds will be mandatorily converted into a lifetime annuity at
retirement. This is still in play.

Georgia – Just at the beginning. Have
commissioned a cost/benefit study

Hawaii – Just at the beginning. Have
commissioned a cost/benefit study

Illinois - Illinois is the first state
to actually enact a state run retirement program. It is a state run
auto-IRA required (mandatory) for employers of 25 or more employees not
offering a workplace plan.

-The mandate won’t kick in until the program
becomes operational. They have not yet issued RFP’s for recordkeeping.

Indiana – This is a VOLUNTARY state-run
program. Because it is voluntary, it is subject to ERISA. This is
basically Indiana entering as a competitor in the space.

Maryland- very close to becoming law.
Mandatory State Run Auto IRA for employers with 10 or more ees. One twist
here is a $300 filing fee being waived as an incentive for employers.
This has unanimous support in Maryland

New Jersey – NJ is adopting the Voluntary
Marketplace model. It is early stages, so details are fuzzy right
now. They aim to have it up and running by 2018. This is b/c it is
a partisan issue, Christie is out in 2018, and wants this in effect in case
Democrats take over as governor. Auto-IRA was originally presented, but
got vetoed by Christie.

Oregon – One of most liberal states in
U.S. In 2015 passed their law. It will be a mandatory Auto-IRA
program, NO minimum employee threshold. Board is working through
schematics on it now.

Washington – Similar to NJ, opting for
Voluntary Marketplace model. They have just issued an RFP for a website
and for product specs.

Again, more detail within the website link (http://cri.georgetown.edu/)
about what every
state is doing. I think this is important b/c, as an industry we potentially will have a
new public option competitor in every state, but every
state may be different. Interesting times.